Funds Europe talks to ACOLIN's Daniel Häfele about excessive regulation in the cross-border funds distribution market and the overdue adoption of digital technology.
A lack of data standards and a surplus of complex local regulations are creating distribution challenges that only greater use of technology can solve. So says Daniel Häfele, founder and chief executive of ACOLIN, the Switzerland-based cross-border fund distribution services provider.
However, the impact of the Covid 19 pandemic and the enforced changes to operating models may act as the much-needed catalyst for a greater adoption of both data standards and data management technology.
Despite the international growth of Ucits funds in recent years, cross-border funds distribution is still an emerging market says Häfele who formed the company in 2006, originally as Fortune Fund Services before rebranding as ACOLIN (short for All Collective Investments) in 2010.
A major turning point was the introduction of new regulations in the wake of the global financial crisis of 2008, such as the Alternative Investment Fund Managers Directive and changes to Ucits rules which placed far more emphasis on oversight. And then the introduction of MiFID II went even further in terms of distribution oversight and product governance. It also looked explicitly at the role of the distributor, introducing the Know Your Distributor principle.
However, while regulatory requirements have continued to go up, the industry-wide adoption of data standards and protocols has not kept pace, which has created a data management problem, says Häfele.
“The biggest challenge is data and the complexity of local regulations. There are no EU-wide regulations for fund distribution but a series of laws and directives that each EU state implements as they like. This makes cross-border distribution very expensive for fund providers,” he says.
Consequently, fund promoters are considering the costs of regulation when deciding where to distribute their funds, sometimes restricting themselves to just two or three markets, meaning that it is just the biggest asset managers that are able to distribute across Europe and beyond.
“Things got a little better when it was decided that just the KIID’s have to be translated into all the different languages,” says Häfele. “But there is not a single European market for funds. It is differently organised. For example, in Spain a single platform dominates while other markets are more fragmented.”
Due diligence excess
The amount of data required to meet target market requirements has jumped from 100 to 150 data points to over a 1,000 as a result of MiFID II. Furthermore, the target market information required by MiFID II necessitates that the data flows not just from the asset manager to the investor but back the other way, complicating things further and creating an additional challenge. “It stops a lot of asset managers from successfully distributing their products.”
There has also been an increase in what Häfele says is “unnecessary” due diligence. “The requirements of MiFID II, Know Your Customer (KYC) and anti-money laundering (AML) rules has led to everyone performing due diligence on the next counterparty in the chain but each one of those is already regulated.
“All European banks, fund management companies and asset managers are fully regulated for AML by its home regulator but asset managers and especially investment fund managers, are not allowed to rely on that and instead have to run their own KYC and AML checks on these fully regulated entities. The regulators have delegated their responsibility back to distributors or fund providers.”
That problem could be easily solved by saying that you don’t need to run due diligence on a regulated entity, says Häfele. However, recent announcements by regulators suggest that asset managers may face even more due diligence requirements. For example, the CSSF in Luxembourg issued a new circular recently that calls for more AML measures. There is obviously no trust between European regulators or else they are looking to protect their own jobs, says Häfele
“It is a big administrative and data challenge for asset managers, with high related cost” says Häfele. “They cannot be sure how to interpret new rules and to distribute new documents and data. You need good data management and most asset managers are not yet ready for that.”
With no sign of any radical change in regulation, it has made the need for greater technology adoption even more urgent, says Häfele.
In many cases, asset managers’ data management involves Excel spreadsheet with no use of application programming interfaces (APIs) and no digitalisation. “Instead you have Excel files or pdfs attached to emails,” says Häfele. “There are some signs of progress with FTP servers being set up and some use of APIs but it is still extremely complex for asset managers.”
So where does the responsibility lie for the lack of digital efficiency? It is the management company, administrator or asset manager that originates the documents and is responsible for reporting to the authorities, says Häfele. The information is then distributed through three or four levels of intermediaries including fund platforms, transfer agents, fund distributors, sub-fund distributors until it arrives at the investors or the adviser. “Typically, one of the parties cannot deal with the format so the distribution chain breaks down,” he says.
There are some industry initiatives that have sought to address this. OpenFunds is a Swiss-based, non-profit consortium of global players collaborating on a common standard for fund data, which ACOLIN has supported from its beginning in 2017. Meanwhile industry associations like Efama have also pushed the concept of data standards. But it takes time, says Häfele.
The most important development, however, may prove to be the enforced lockdown that has resulted from the Covid 19 pandemic. The change in operating models has affected everyone and exposed the most senior management to the importance of technology. “I am 100% sure that Covid 19 will accelerate digitisation. Firms realise the need for new technology and furthermore it is the senior staff that realise this – the decision-makers.”
“They have had to stay home and use new technology themselves - new apps such as video conferencing, and it worked. This changed the mindset among board of directors and now they are looking at operational issues like manual processing and not just leaving it to the operational teams. They have also had more to consider how they should be operating and wow they are talking about APIs and not sending PDFs attached to emails anymore.
They have realised that it is time to start looking at things more efficiently and investing in APIs rather than attaching PDFs to email and are far more willing to make the necessary investment, says Häfele. “It used to be that the idea of investing in technology was considered too expensive and beyond their budgets, but that has changed because of Covid 19. Asset managers face reduced margins due to the increased cost of distribution and an unwillingness to pass this cost onto investors via a rise in fees.”
Asset managers are the ones that have the greatest interest and responsibility to promote data standardisation and automation, says Häfele. And he suggests that they should be using their influence to pressure their service providers to improve their own technology adoption.
“It is all extra administration costs that either gets charged to investors or taken from their fees,” says Häfele. “It is time for asset managers to take the lead on digitisation.”
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